The Mad World of Money

About 4.4 million workers disappeared from the labor pool over the last four years. Where did they go? No one quite knows, exactly.

They don’t show up in the unemployment numbers. But they do exist, hidden behind the statistical shadows. The lucky ones, those who are gainfully employed, get after it each day. They go to work and trade their time, talents, and labors in exchange for money. Of those, a small subset is able to spend less than they make…and save the difference.

If the difference becomes big enough, and they save long enough, eventually they’ll build real and lasting wealth. One day they may no longer have to work, if they don’t want to. Unfortunately, getting to that point has become increasingly more difficult.

For while the hardworking, prudent, fellow may be able to scrape together a small grubstake. All the time, even while sleeping, an appointed bureaucrat is busy shoveling money out of his bank account through the back door. It really does sound quite fantastical, no? But it is happening all the same.

On Wednesday, for example, Federal Reserve Chairman Ben Bernanke told Congress that he and his cohorts will continue working hard to make prices more expensive. Here are some excerpts from the Fed Chair’s prepared statement…

The Purpose of Monetary Policy Tools

“Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools.

“The first of these alternative tools is ‘forward guidance’ about the FOMC’s likely future target for the federal funds rate. Since December, the Committee’s post meeting statement has indicated that its current target range for the federal funds rate, 0 to 1/4 percent, will be appropriate “at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

“The second policy tool now in use is large-scale purchases of longer-term Treasury securities and agency mortgage-backed securities (MBS). These purchases put downward pressure on longer-term interest rates, including mortgage rates. For some months, the FOMC has been buying longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month. The Committee has said that it will continue its securities purchases until the outlook for the labor market has improved substantially in a context of price stability.”

When you distill it all down to its very essence, the purpose of these monetary policy tools is to cheapen the dollar. Bernanke wants people to spend; not save. He believes this will stimulate demand, boost the economy, and create new jobs. That’s what his charts and graphs tell him will happen.

Unfortunately for Bernanke, the world is not static. It’s dynamic…

The Mad World of Money

Because while Bernanke’s trying to cheapen the dollar to stimulate demand, his counterpart, Haruhiko Kuroda, at the Bank of Japan, is busy cheapening the yen. In fact, in the race to the bottom the yen is running leaps and bounds ahead of the dollar.

Over the last four and a half months the dollar has gained 25 percent against the yen. The effect of a falling yen has been a booming Japanese stock market. Over the last year, the Nikkei 225 had run up nearly 80 percent…before vomiting on itself Thursday and crashing 7.3 percent in a single day.

Nonetheless, the rapid stock market rise has been a real delight for Japanese investors. But, because it’s fueled by an abundance of cheap credit, it may also be signaling a looming yen currency collapse…the effects of which would be disastrous. No doubt, we’ll be sure to monitor the situation for you.

Back here in the U.S., the situation is a bit different. The dollar is still the reserve currency of the world. What this means is Bernanke’s playing a risky game.

Belgian-American economist Robert Triffin identified the dilemma 50 years ago. According to Triffin’s dilemma, Bernanke must supply the world with an abundance of dollar reserves. But in doing so, the United States must run a trade deficit. It must import more than it exports. It must spend more than it earns. In other words, it must eventually go broke.

The United States has been running consistent trade deficits since 1980. Yet, despite years and year of this, and Bernanke’s best efforts to cheapen the currency, foreign lenders continue to demand dollars. Who knows how long this can go on? It makes no sense. But this is the mad world of money we live in.